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This session examined recent changes to the Medicare program, as stipulated in the Balanced Budget Act (BBA) of 1997,
that could have a significant impact on rural areas.

HCFA's Jean LeMasurier said that in enacting these "structural"
reforms, Congress hopes to modernize Medicare, preserve consumer choice, and stimulate further development of
managed care options for Medicare beneficiaries in rural areas. In particular, the new Medicare+Choice program (a.k.a.,
Medicare Part C) adds a private fee-for-service Medicare option and significantly expands the various kinds of entities that
may obtain Medicare risk contracts to include not only health maintenance organizations (HMOs), but also Preferred Provider Organizations (PPOs), and provider-sponsored organizations
(PSOs). It also changes the formula for capitation payments to risk contractors, eliminating the current methodology based
on adjusted average per capita costs (AAPCCs) and phasing in a blended rate formula (50:50 local and national prior
adjusted payment rates) over 6 years with a minimum payment amount of $367 per member per month.

Greg Nycz of the Marshfield Clinic, which was one of the first rural-based health care organizations to participate in
Medicare managed care demonstrations beginning in the late 1970's, said that the new $367 payment floor may constitute
a meaningful increase in counties that historically had very low AAPCCs, (e.g., for those now below $337 per member
per month in 1997, the new payment level would be more than HCFA's estimated costs of providing fee-for-service
Medicare benefits in these areas).

However, he warns that even $367 per member per month (PMPM) may not be sufficient to succeed in offering a
comprehensive managed care plan, noting that this is still only 76 percent of the nationwide per capita cost. Nycz said that
for those already above the floor, blending the rates will provide payments above estimated costs in some counties,
especially after the year 2000.

Commenting on how the BBA gives States the option to modify their existing geographic
payment areas from countywide to multicounty or statewide, Nycz said such changes could further increase rural payments
and help reduce the variations that often exist across county borders. Predicting a general period of "competitive
unevenness" regarding the Medicare changes, Nycz highlighted that although fee-for-service Medigap insurers may use
age rating, PSO/HMO risk contractors must use community rating. He predicted that the new payment rates will not be
sufficient to overcome the age-rate advantage in many markets and encouraged State insurance commissioners to review
regulations governing age-rate disparities.

Nycz also shared data demonstrating adverse selection in their Medicare
supplemental plan and cautioned that rural-based PSOs may face similar difficulties, stressing the importance of
implementing a risk adjuster in the payment methodology.

Allen Feezor began his comments by pointing out that Medicare and Medicaid payments represent a very high percentage
of revenues to rural providers—as much as 75 percent to some institutional providers. He echoed LeMasurier's
observations that rural providers may be interested in forming PSOs in order to eliminate the insurance "middle man," but
warned that they should carefully consider the implications of getting into the insurance business. He suggested that it is
important for policymakers to reconcile conflicting policy objectives, such as encouraging managed care growth,
maximizing short-term savings, and enhancing rural care.

Feezor encouraged State officials not only to consider the
implications on rural providers as they develop various rules/regulations regarding managed care and risk-bearing entities,
but also to help rural providers understand the purpose of and various issues regarding solvency protections, consumer
safeguards, and the collection and use of information.